Cash Flow in One
Security	Market Price Today	Weak Economy	Strong Economy
A	140	0	500
B	??	500	0
Market Index	600	500	1000

Assume both states of the economy are equally likely.

a) What is the no-arbitrage price of security B? (1 mark)

b) What is the market price of a portfolio consisting of one share of security A and one share of security B? (1 mark)

c) What is the risk-free rate of return in this economy? Explain why this is the risk-free return. (2 marks)

d) What is the expected return of security B? What is its risk premium? (2 marks)